Thank you, Mr. Deputy Speaker. I am grateful for the opportunity to raise my concern about the impact upon specialist high street retailers of the exemption from value added tax of personal imports of food supplements, herbal remedies and other products such as compact discs and DVDs from the Channel Islands. My concern is shared by many hon. Members, some of whom have signed early-day motion 152 tabled by my hon. Friend Dr. Iddon, and my own early-day motion 1767, tabled in the previous Session. I am grateful to the Minister for being in his place and I look forward to hearing his response to the concerns that I raise.

I was alerted to the situation both by the National Association of Health Stores and by the national retail chain, Holland and Barrett, which has a major facility in my constituency employing 200 people. I do not want to trigger a full-scale debate about the constitutional governance arrangements of the Channel Islands, nor do I want to focus unduly on the way in which to date the islands, like the other Crown dependencies, have avoided meeting their obligations under European Union treaties to implement such measures as European medicines legislation, the food supplements directive, and more recently the nutrition and health claims regulation.

However, I cannot fully make my case about the serious and adverse impact that low-value consignment relief from VAT is having without explaining that the failure to implement those European legislative measures has allowed to develop in the Channel Islands an export business in food and herbal supplements that can reasonably be estimated to be worth around £100 million per annum, a staggering sum given the small population of the islands.

This huge export market is generated through very active direct marketing mailshots to UK mainland consumers. Tens of millions of them a year receive catalogues through the post, which promote the products of the Channel Islands companies and appear to come from addresses with reassuringly familiar postcodes which imply that the senders are located in part of the UK, when they are not. Above all, the industry in the islands has benefited dramatically from the provision that personal imports of goods from the islands are exempt from value added tax for consignments with a total value of less than £18.

I am a great supporter of my right hon. and hon. Friends in the Treasury ministerial team. They have displayed great competence during the recent City cataclysms, but I am left scratching my head wondering what possible justification there can be for giving a huge exemption from value added tax to those products. The impact of this business, with a value of £100 million per year and rising steadily, is substantial. Independent specialist high street health food shops are closing at a rapid rate as their profits are squeezed by this unfair and illegal competition. The loss to Treasury revenues, therefore, is significantly greater than the sum of the VAT on the imports. It is also losing the tax revenues from the struggling independent retailers.

The scale is staggering. One company alone, created by the merging in April last year of Healthspan Group and Healthy Direct, based in the Channel Islands, now accounts, according to the industry analysts Euromonitor, for 4.9 per cent. of total UK sales of vitamins and dietary supplements by retail value, or a staggering 21.3 per cent. or £49.4 million of total UK non-store sales, assuming, as is the case, that the overwhelming majority of sales by that group are non-store—and that does not include their considerable sales of herbal remedies.

It is not only the specialist food supplements and herbal remedies sector that is reeling under the impact of that unjustifiable tax break. We have all observed the steady decline in recent years in the number of independent high street retailers of CDs and DVDs as that industry has relocated, at least notionally, offshore to the Channel Islands. Tens of millions of imports of such products are now shipped annually into the UK and delivered direct to the homes of consumers at prices that no responsible high street retailer in the mainland could hope to match.

The Channel Islands authorities have misled officials and Ministers by suggesting that they are cleaning up their act and preventing further relocations for the purposes of tax avoidance. Yet information supplied to me by the independent CD and DVD sector suggests that Jersey is now the fulfilment base for Asda, Play.com, CD101 and BlahDVD. Tesco, which was excluded from the island in 2006, is now reportedly operating again through a Jersey-based fulfilment business, TheHut.com. HMV and Amazon, under a sister company name of Indigo Starfish, operate out of Guernsey.

The trend of major corporate names shifting their fulfilment to the Channel Islands continues, and the only benefit of the so-called tighter regime is to guarantee additional business for the operators already there. Many of the goods in question are actually manufactured in the UK, shipped to the Channel Islands and then moved back to the mainland through the mail. The sole purpose of that manoeuvre is tax avoidance. Like the Minister, I am a believer in the benefits that competition can bring to consumers, but that competition is unfair and in some cases illegal. It can have no public policy justification.

The European Commission has begun a formal investigation of the situation. I encourage all those who share my concerns urgently to contact the commissioner with responsibility for taxation and customs union. Such non-taxation is an artificial advantage to Channel Islands companies, and as such is in breach of the sixth VAT directive, a breach which obliges the United Kingdom to take action to prevent the abuse. The situation is clearly one of tax avoidance, which is illegal, and the Government must act.

Specifically, in European law, where low-value consignment relief is available it must be applied in a way that ensures that it does not give rise to any evasion, avoidance or abuse, or a distortion of competition in the United Kingdom market. Indeed, directive 83/131 makes it clear that the power of member states to allow LVCR is subject to the above two conditions. The fourth recital provides:

"whereas the exemptions on importation can be granted only on condition that they are not liable to affect the conditions of competition on the home market".

"the Member States shall apply the exemptions laid down in this Directive under the conditions fixed by them in order to ensure that such exemptions are correctly and simply applied and to prevent any evasion, avoidance or abuses."

The UK is also under a general obligation to administer the VAT system in accordance with the general principles of the sixth directive. As the Court of Appeal affirmed in HMRC v.IDT Card Services Ireland in 2006:

"the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of distortion of competition are general principles of the Sixth Directive."

The distortions to trade in terms of the tax advantages are significant and are contrary to European law, and it is incumbent both in the sense of natural justice and in terms of legal obligation for the United Kingdom tax authorities, rather than those of Jersey and Guernsey, to ensure compliance with the law.

Treasury Ministers must address that matter without waiting for the Commission. Officials defend the provision, because to abolish it would require the commitment of resources to claim VAT on many small transactions. In fact, on food supplements and herbal remedies alone, the revenue would clearly be in excess of £17.5 million annually, making the exercise more than worth while, particularly when we consider the further tens of millions of pounds of lost revenue from the DVD and CD sector. Indeed, in the pre-Budget report 2006, the Treasury indicated that the lost revenue was already running at £85 million a year, and the problem has grown substantially since then. The only reason why the businesses are in the Channel Islands is to avoid VAT. If the loophole ended, they would relocate to the mainland and suddenly there would no longer be any problem with revenue collection.

I do not have any truck with claims that ending the loophole would impose burdens on Royal Mail, which is benefiting massively from the huge business not only in delivering the products, but in delivering each year tens of millions of catalogues that make claims that would be illegal if made about products placed directly on the UK market. As a responsible business, Royal Mail will surely want to play its part in ending this abuse and deliberate tax avoidance. Furthermore, ending the avoidance loophole would simply lead to the relocation of the businesses back to the mainland, where the company would still benefit from their business—probably to a greater extent, as profits would not be shared with Jersey Post.

In the long term, consumers do not benefit from this gross and complex tax avoidance network. Although in the short term they may pay a slightly lower price by avoiding the VAT, market share is becoming increasingly concentrated in all the sectors that I have outlined. Independent retailers are closing, and choice and diversity are being undermined. Once the market is dominated by one or two major players, prices will surely start to rise as competition is stifled.

Officials frequently confirm that the matter is kept under review. Yet Ministers have admitted in parliamentary written answers that they do not have information on the breakdown by product category of the imports in question. How can they possibly, therefore, keep it under review? What specific criteria is this review using in assessing the impact of the provision? When and how do the Government intend to calculate the total cost to the Treasury in lost revenue, from not only health products, DVDs and CDs, but the other product categories that are exploiting this loophole? By what timetable is the review being conducted? When will its conclusions be known? What compensation will be given to responsible high street retailers suffering loss of business in the meantime? Finally, will my right hon. Friend personally investigate the matter and ensure that this illegal and unjustifiable tax avoidance is brought to an end?

I congratulate my hon. Friend first on the auspicious birthday that I understand she will be celebrating in two hours' time. I wish her many happy returns, and hope that I am the first to do so. I also congratulate her on securing this debate on an important subject that she has pursued for some time. I am grateful to her for raising the topic of low-value consignment relief and giving me the opportunity to set out the Government's position.

The £18 VAT relief threshold applies to all goods imported into the UK from outside the European Union, with the exception of alcohol and tobacco, for which other rules apply. It is important to underline that fact; the arrangements in Jersey and Guernsey are not improper. The £18 relief applies to goods coming from anywhere outside the European Union, and as the Channel Islands are outside the EU, it applies to goods coming from them. The relief falls under European Community VAT legislation that requires member states to exempt from VAT all eligible goods with a value of less than €10. Member states may increase the threshold to €22 if they so wish and, like the majority of the other member states, the UK has always applied the maximum relief allowable since the introduction of the directive in 1983. We do that to reduce the administrative and operating costs of calculating, collecting and paying small amounts of tax on very large numbers—millions—of low-value goods.

The current UK limit of £18 was equivalent to the €22 limit used by eurozone countries when the limit was first set in 1983. However, my hon. Friend is right to draw attention to some of the effects that that threshold has led to. She said that she thought that the Treasury was losing some £70 million of VAT on health products and quoted a figure from the 2006 pre-Budget report—an estimate of the overall loss to the UK Exchequer from the VAT threshold. We estimate that, for 2008, the amount of VAT exempted by the relief was £110 million. That is a new figure. As she says, it is on the rise, although it is important to underline that any net value to the Exchequer from collecting that revenue would be significantly less because there would be large administrative and operating costs involved in collecting it and considerable difficulties in enforcing any new rules comprehensively, given the volume of international mail and fast delivery service traffic.

There has been a big increase in the volume of low-value goods imported into the UK from all over the world. A large proportion of goods that benefit from the relief are supplied from the Channel Islands, as my hon. Friend rightly pointed out, reflecting the convenience and cost advantage—and, as she said, the familiar postcodes and addresses—that come from using the islands as a base for supplying the UK market. However, we should not lose sight of the potentially significant difficulty of trying to impose a VAT charge even on very low-value items, which would be the case if the threshold were not in place. A wide range of goods are imported under the relief, but my hon. Friend and others have raised particular concerns about the increase in the import of health foods and supplements and of CDs and DVDs from the Channel Islands, and the impact that that is having on UK-based retailers.

Following discussions with UK officials in 2006, Jersey and Guernsey issued policy statements making it clear that they are opposed to the growth of so-called third-party facilitators on the islands. Those facilitators exist to provide logistical services to UK-based companies, enabling them to benefit from the relief by exporting UK-originating goods through the islands without making any investment in establishing wider real economic activity there. The islands' authorities recognised that that was damaging to their international reputation and credibility and undermined the UK tax base. The policy statement issued by the States of Jersey introduced a licensing regime for companies and facilitators supplying goods by post to UK consumers. Companies supplying CDs and DVDs were granted only a 12-month licence and, at the end of that period, the licences were not renewed, so a number of companies were required to leave the island: my hon. Friend mentioned a couple of them. She also said that one or two had come back in a different form; that is news to me, and I will investigate it tomorrow.

Since 2007, the Jersey authorities have refused to grant a licence to any new company operating in the CD and DVD market and wishing to relocate from the UK to Jersey. Equally, any new company wanting to relocate to Jersey is required to obtain an operating licence before it can start trading. The Jersey authorities have stated their strong presumption that licences will not be granted when there is no investment in the wider economic activity on the island. Following the withdrawal of licences, only one big company supplying CDs and DVDs from the island to the UK remains; it is a company that has been based in Jersey for quite a long time.

My hon. Friend mentioned the development of Channel Island-based organisations effectively acting as front organisations for those that can no longer relocate there. That is a fair point, and we are seeing some of that in response to the restrictions that have been introduced.

As far as Guernsey is concerned, I understand that the authorities there cannot introduce a licensing system similar to the one in Jersey because of the constraints of the local constitution. However, the Guernsey authorities have adopted a policy statement quite similar to that of their Jersey counterparts and used other available powers, including planning controls and employment permits, to limit the growth of activity on the island that involves the exploitation of the relief by UK-based companies. Guernsey has made it clear to a number of UK companies involved in music retailing, including those that have been forced to close their Jersey operations, that it does not wish to see them establish activities on the island.

I know of at least one big UK company that established itself in Guernsey before the current policy was introduced and remains active on the island. I have been informed that, earlier this month, the States of Guernsey prepared a code of conduct intended to limit the supply of goods to the UK by the mail order sector. The code acknowledges there has been negative publicity about such companies and is intended to engender a certain level of self-regulation. It provides a benchmark of standards that signatory companies are expected to maintain, and it addresses a number of other consumer protection issues including those specific to the food supplements, vitamins and health products sector.

As a consequence of the measures taken by the Channel Island authorities, we believe that the growth in the music sector there since 2006 has been curtailed. Of course the position might change, and my hon. Friend suggested developments that might lead to such a change, but that was the case at least until very recently. Certainly the exponential growth in the cost of the relief that some feared has not materialised, despite the rapid growth in internet shopping. The figure that I have mentioned underscores that point.

To address the activities of the remaining companies that are selling CDs and DVDs to the UK market from bases in Jersey and Guernsey, my officials have been discussing ways in which the island authorities can restrain the growth of those supplies. As I think my hon. Friend will understand, I cannot set out details of those arrangements because of commercial and diplomatic confidentiality, but I understand that good progress to that end has been made with the authorities in Jersey. It is proving more difficult to secure a satisfactory outcome in Guernsey, but my officials are due to have a further meeting with the Guernsey authorities very soon. After that, they will report to me on progress and I will consider what further action may be necessary. Perhaps at that stage it would be helpful if my hon. Friend and I had a further conversation about how things have been going.

Of course, we must bear in mind that the market for audio and visual media is moving rapidly towards electronic downloads over the internet, rather than the sale and dispatch of physical media. That is changing the situation again, and we will continue to keep track of market developments and adapt tax and other policies as required.

If the Government decided to reform the low-value consignment relief, a number of options would be permitted under European Community law. We could reduce the threshold to the minimum level of €10 or seek a derogation from the European Commission to remove the relief from specific goods such as health products or CDs and DVDs, or from imports from certain countries. However, although some retailers might benefit from such a change, the knock-on effects on others would have to be considered. If the threshold of the relief were reduced to the lower limit, it is estimated that up to an extra 50 million small parcels a year would be subject to VAT. That would require substantially increased resources at Her Majesty's Revenue and Customs for calculation and enforcement of import taxes. My hon. Friend did not express too much sympathy for that concern, but it needs to be taken into account. Indeed, there would be a further impact on Royal Mail and other carriers.

Does my right hon. Friend accept that, if we take away the incentive for distribution in the Channel Islands through alterations to the relief, we would encourage those companies to come back to the UK mainland, and there would then be no problem with the VAT?

My hon. Friend makes a fair point. VAT would have to be paid on supplies from the Channel Islands. People would have to go to their local Royal Mail sorting office, hand over money and so on. Of course, she is right—if the operations moved back to the UK, such problems would not arise.

There would be an increase in the cost of goods, not only from the addition of the VAT, but from charges applied by the carriers for clearing packages through customs, and the associated need, in many cases, to travel to a mail delivery office to make payment. All that is on the assumption that goods would continue to come in from the Channel Islands.

We are also concerned that any restriction that we apply to the current threshold, or derogations against specific goods or exporting countries, could encourage businesses to reroute their low-value goods, quite legally, through other European Union countries that maintain the higher relief threshold. For example, it would be possible to send goods from the Channel Islands to France, from France to the UK and, because France still had the higher threshold, it would not be too difficult to reproduce the benefits of the current arrangements for companies that export directly from the Channel Islands to the UK. Once goods have been given customs clearance in the European Community, they can move between Community countries without restriction. A specific example would be goods sourced from Switzerland going through Italy or Germany to other member states.

We need to consider the interests of a wide variety of those affected. As with all aspects of the tax system, we must balance the cost of compliance and enforcement of the rules with the need to protect the revenue and minimise any impact on UK markets caused by the application of the relief.

We are, of course, sympathetic to the difficulties that small UK businesses face. My hon. Friend mentioned some of the problems, which perhaps partly arise because of the phenomenon that we are discussing in the debate. The Chancellor outlined several measures in the pre-Budget report that were specifically designed to help small and medium-sized enterprises weather the tough current economic climate. For example, an HMRC scheme enables firms facing difficulties to spread their tax over a timetable that they can afford. We have agreed additional facilities with the European Investment Bank to provide lending to UK banks. We have also set up a temporary guarantee scheme.

We must recognise that it is not solely—or perhaps even mainly—the VAT advantage enjoyed by offshore internet-based retailers that affects their competitive positions in relation to UK-based small businesses. We need to bear in mind that large retailers, whether operating offshore or not, enjoy a competitive advantage simply because of their size and ability to obtain discounts from suppliers. Those advantages would be retained, whatever the arrangements and relationship with the Channel Islands. In the event that HMRC viewed an arrangement as unacceptable or abusive, it would respond to stop that in the ordinary way.

Officials in the Treasury and in HMRC are actively examining and pursuing low-value consignment relief. I cannot offer a quick solution today to the problems to which my hon. Friend has rightly drawn attention. I hope that she will take some comfort from the steps that I have set out, the action that is being taken, and the discussions that have happened and that will continue with the authorities in the Channel Islands.